OPEC must prepare for big rise in oil supplies

High oil and gas prices have unleashed the biggest drilling boom in 30 years.

OPEC members must prepare for a big increase in oil supplies in the second half of the decade, as well as heightened competition from natural gas in some of their core markets, and a further erosion in demand as conservation and efficiency measures bite harder.

Outside North America, the number of rigs actually drilling for oil and gas averaged 1,277 in January and February, the highest since 1983, and more than double the number operating in 1999, according to rig counts published by oil field services company Baker Hughes International on its website.

Baker Hughes probably understates the growth in worldwide drilling since it excludes rigs operating in Russia, the Caspian, Iran, Sudan and onshore China. It only counts rigs actually drilling, not those in transit, moving in and rigging up, or engaged in production testing, completions and well workovers.

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Baker Hughes rig count:

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The last drilling surge, which came in response to higher prices following oil shocks in 1973/74 and 1979/81, produced a big increase in oil output.

Global production outside the Middle East rose by 3.2 million barrels per day (bpd) (7.1 percent) between 1980 and 1985, according to the U.S. Energy Information Administration (EIA).

Production surged 52 percent (1.6 million bpd) in Europe as a result of new fields in the North Sea, and by 9 percent in North America (1.3 million bpd).

Only a massive drop in output from Middle East producers, led by Saudi Arabia, Iraq, Kuwait and the United Arab Emirates, averted a huge glut and an even steeper fall in prices.

Saudi output was slashed from 10.3 million b/d in 1980 to just 3.8 million b/d in 1985, according to the EIA. Iraq, Kuwait and the Emirates cut their own output by a combined 2.2 million b/d over the same period.

For the time being, supply and demand remain balanced.

Higher production from shale in North America is being offset by substantial outages elsewhere, principally as a result of sanctions on Iran. Falling oil consumption in the United States and Europe is matched by steady, though moderating, growth in China and the Middle East.

But the medium term outlook is for slow demand growth and a big increase in supplies as the 30-year high in exploration and development activity turns into more new production.

HOT PROSPECTS

Much of the growth in oil and gas supplies outside North America is coming from conventional fields. But unconventional tight petroleum and deepwater resources will continue to gain in importance, according to Paal Kibsgaard, chief executive of field services company Schlumberger, speaking at a conference on Monday ().

“For unconventional resources, North America will remain the centre of activity with light tight oil being the primary objective. In the international unconventional plays, the short-term focus will still be on pilot projects but activity and production will likely start to become more meaningful in the second half of this decade,” Kibsgaard predicted.

“Production from deepwater fields will continue to grow as the successful exploration activities of recent years lead to a new development cycle.”

Like rivals Baker Hughes and Halliburton, Schlumberger is a bellwether for exploration and production.

Kibsgaard highlighted strong growth in the Middle East (Saudi Arabia and Iraq), Russia (Sakhalin, the Caspian, Siberia and the offshore Arctic), and sub-Saharan Africa (following numerous oil discoveries off the west coast and gas off the eastern seaboard).

In China, the company sees strong prospects in three areas: maximising production from conventional resources, accelerating unconventional gas resources, and pursuing deepwater exploration and production.

“The customer base in China is … expanding quickly after shale activity was opened up to a wide range of companies outside the traditional E&P industry,” Kibsgaard explained.

“While we see solid activity growth in the shale gas basins in the medium term, we still expect the strongest activity growth in 2013 to come from offshore areas and complex conventional land developments.”

THE CYCLE TURNS

Concerns about peak oil have proved unfounded. However, growth in gas and especially oil output continues to be constrained by shortages of everything from specialist equipment to experienced personnel.

Cost inflation remains far above other industries, though it has moderated in the last couple of years.

As exploration and production focuses on more complex fields, at greater depths, under more pressure, far under the ocean or in the extreme cold of the Arctic, and with more challenging geology, the industry is struggling to keep up with rising demand for highly specialised engineering equipment, surveying and field visualisation technology.

Nonetheless, the oil boom is nearly a decade old. The large amount spent on exploration and production, as well as industry innovation, are starting to yield substantial results. The biggest impact has been in North America but the doubling rig count in the rest of the world underlines how fast the production landscape is changing.

Successive record average prices for Brent in 2011 ($110.91), 2012 ($111.68) and so far in 2013 ($113.16) have concealed the fact the industry is no longer operating in the short run (where supply and demand are largely fixed) but has moved well into the medium and long run (where all aspects of production and consumption become highly variable).

For oil producers, the best years of the oil boom may now be past. OPEC has an important role to play in helping its member countries plan for a future where both their market share and prices may be under more pressure.

Previous attempts at strategic planning, including the Long-Term Price Policy Committee in the 1970s and 1980s, proved unsuccessful, and face daunting obstacles today.

But the organisation is ideally placed to help educate ministers and officials, challenge members to think realistically about the outlook, and confront overly optimistic assumptions.

The initial results of the drilling and fracturing boom have been dramatic in North America but the technology is only now starting to be deployed globally. The drilling boom’s full impact will only make itself felt over the next decade.

Like the international oil companies, and consuming nations, OPEC needs to start thinking about the profound changes in the marketplace still to come.

Whoever wrote this needs to learn that if you’re telling a joke, you get more laughs if you put the punchline at the end. Putting it in the title has the positive effect of being surprising, but some folks might get the idea that you’re trying to be serious.

Plantagenet on Thu, 21st Mar 2013 5:52 pm

Drill baby drill—and then frak the pay zone.

It works in the USA—-it should work in the UK, France, Poland, Russia, China, Argentina and places with shale basins around the world as well.

Beery on Thu, 21st Mar 2013 6:11 pm

By ‘it works’, you mean that it fools naive people into investing in depleted oil fields that will never turn a profit beyond the first year.

Yeah, it works great.

Bob Owens on Thu, 21st Mar 2013 8:45 pm

It’s easy to tell that this article is mainly fiction. Look for the key words: “depletion rate”. If there is no discussion of this it is not an article that you can have much trust in. Also, look for real facts that make sense to you. No numbers quoted, no facts, don’t trust it. Use your critical reasoning; you can trust that.

BillT on Fri, 22nd Mar 2013 12:37 am

The plethora of such articles only points to the fact that the big oil companies are running scared.